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Technology Retirement savers: Are you part of the 34% of Canadians making this RRSP mistake?

17:15  14 november  2019
17:15  14 november  2019 Source:   fool.com

43% of Canadians are still making this classic retirement mistake

  43% of Canadians are still making this classic retirement mistake Royal Bank of Canada (TSX:RY)(NYSE:RY) found that roughly half of Canadians aren't using a tax-advantaged retirement account. That's a huge mistake.If you don’t have one of these tax-free investment accounts, you’re making a huge mistake. Over several decades, your potential tax savings could total $100,000 or more. All you have to do is register for a TFSA or RRSP and begin contributing. If you’re still not convinced, perhaps some math will do the trick.

Any particular retirement plan might have some particular rules about RMDs, so it's worth looking into what the rules are for your particular retirement As the IRS explains, "Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be

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a close up of text on a white background: question marks written reminders tickets© Provided by The Motley Fool, Inc question marks written reminders tickets

According to a Bank of Montreal study from earlier this year, 34% of Canadians are making a major RRSP mistake — a mistake that could cost them dearly come tax time.

It’s a trap that most investors are aware of, yet many still find themselves falling into when times are tough.

If you’ve got major expenses looming, it’s easy to find yourself committing this mistake even when you’ve sworn you’d never do so.

Fortunately, as you’re about to see, there’s an easy way to avoid the trap–even if you think you’ve got a truckload of expenses coming up on the horizon.

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Any particular retirement plan might have some particular rules about RMDs, so it's worth looking into what the rules are for your particular retirement account. As the IRS explains, "Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can

Toronto-Dominion Bank’s (TSX:TD)(NYSE:TD) dividend won’t be taxed if it's held in your RRSP instead of your TFSA.

Withdrawing from your RRSP before retirement

Withdrawing from your RRSP before retirement is generally acknowledged as a major mistake. Although RRSP investments grow tax-free (i.e., you pay no dividend or capital gains taxes while your investments are in the account), funds are taxable upon withdrawal.

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If you’re still earning an income, that tax can be very high since it’s based on your marginal rate. If you’re earning over $210,000 a year, expect to pay $33% in federal taxes alone.

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“For the most part , when you look at middle-income Canadians they are saving . So one of the problems with the statistics is that they end up being misleading.” Where young and middle-aged would- be savers are concerned, a dramatic increase in housing prices relative to wage growth has

Visit the Canadian Virtual War Memorial. Anthems and symbols of Canada . Find a CRTC decision. The part that you transfer cannot be more than the employee’s available RRSP deduction limit for The part of the retiring allowance paid in each year that is eligible for transfer should be reported on

There are a few exceptions that permit you to withdraw from an RRSP early without a tax penalty. If you’re planning on buying a home, you can withdraw up to $25,000 under what’s called the Home Buyer’s Plan.

You can also withdraw up to $10,000 a year tax-free into a Lifelong Learner’s Plana different type of registered account with its own rules and regulations.

Why it’s a mistake

The reason withdrawing from an RRSP early is such a big mistake is because it defies the logic of having an RRSP in the first place.

The reason people open RRSPs is to enjoy tax savings.

If you’re withdrawing early and paying a tax of over 20% on what you’ve earned, that defeats the purpose of opening the account.

Of course, it all depends on the amount of tax-free gains you’ve managed to accumulate. If you withdraw from an RRSP after netting a 1000% return on a speculative growth play, it’s still a net winner even after factoring in all the taxes.

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As their name implies, Registered Retirement Savings Plans are intended for retirement . But it turns out that thousands of Canadians have cashed in some of those funds well before reaching that stage in life. Thirty-four per cent of us have withdrawn money from RRSPs in advance of retiring , according to

The RRSP which in full reads as " Registered Retirement Savings Plan " is a sheltered account provided by the government to Canadians to help You may be able to request a waiver/refund of all or part of these taxes if you are able to show that you made a reasonable error and dispose of the

However, apart from an RRSP, only 50% of a capital gain is taxed, and you need an actual gain to even be taxed. When you withdraw money from an RRSP it’s taxed even if your investments went nowhere.

What to do instead

The most obvious objection to everything I’ve said so far would be something along the lines of, “Of course I’m not planning on withdrawing early, but what if a financial emergency comes up?”

It’s true that if you need money to pay for emergency expenses at the last minute, you may have to cash out of your RRSP–assuming that’s the only retirement vehicle you own.

However, if you have a long time-horizon ahead of you, you can easily avoid ever having to do that.

How? Well, by spreading your retirement investments across a TFSA and an RRSP.

TFSAs allow you to grow your investments tax-free just like RRSPs. However, unlike RRSPs, TFSA funds aren’t taxable on withdrawal. Further, TFSAs let you re-contribute withdrawn income in the next year, giving you a double dose of flexibility.

So, if you have part of your retirement savings in a TFSA, you can withdraw it without the slightest pang of guilt.

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As a resident of Canada , distributions from an RRSP are be subject to ordinary income tax rates depending on the province of tax residency. The bank or custodian holding the RRSP would be obligated to withhold tax upon the RRSP distribution at the following rates

65% of Canadians are saving for retirement , census shows. More than 45 per cent of them contributed to an RRSP , compared to 37 per cent of people aged 25 to 34 . They're also most likely to contribute to both RRSPs and TFSAs, compared to younger people, who may be stretched to buy a

Consider the case of an investor holding a position in iShares S&P/TSX Capped Composite Index ETF(TSX:XIC), who suddenly has to pay expenses related to property damage but has no cash savings.

XIC, as a highly liquid fund, can easily be sold on the market and used to finance sudden expenses like this, so the investor has that option available. However, if they hold their entire position in XIC in their RRSP, they’ll have to weigh the costs of withdrawing their RRSP funds vs borrowing money–if they’re a high earner, borrowing may well be cheaper!

The investor holding an XIC position spread across an RRSP and TFSA faces no such dilemma. With their liquid ETF sitting happily in a TFSA, they can cash out, withdraw and easily cover any expenses that come up–without worrying about a tax bill.

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Retirement savers: Are you part of the 34% of Canadians making this RRSP mistake?

  Retirement savers: Are you part of the 34% of Canadians making this RRSP mistake? Author Richard Moxley talks about the rules that every Canadian must know to win the credit game, and find financial freedom.

Planning out retirement can be daunting, regardless of your age. But one of the most common retirement savings options in Canada , the Myth 3: Other sources will fund retirement , so an RRSP isn’t needed. 49 per cent of Canadians who responded in the poll don’t cite an RRSP as one of their

Many retirement savers are incorrectly using a popular 401(k) investment option -- and are losing out on thousands of dollars in potential returns, according to a new study. Target-date funds have become a popular option in company 401(k) plans , in large part because of their simplified approach to investing.

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More reading

  • Retirement Savers: 3 Ultra-Safe ETFs for Your RRSP or TFSA

Fool contributor Andrew Button has no position in any of the stocks mentioned.

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Canada Revenue Agency: 1 RRSP Mistake Will Leave You With a Huge Tax Bill .
As amazing as your RRSP can be for your retirement, there is one crucial mistake Canadians should avoid and invest in Royal Bank of Canada stock.When it comes to retirement savings, Canadians have several options to bolster their nest eggs. One of the most tax-advantaged ways to save a substantial sum of money for your retirement is the Registered Retirement Savings Plan (RRSP). This savings plan allows you to control how you invest your money, which you can use later on after your retirement.

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